Weekly Market Update by Retirement Lifestyle Advocates
stocks finished down for the week with the Dow Jones Industrial Average
declining 1.37% and the broader Standard and Poor’s 500 falling 1.25%.
story of the week was the price action of US treasury long bonds and precious
metals. The long bond rallied powerfully
with yields plummeting .14% back below 2%.
Metals advanced strongly as we have been anticipating. Gold and silver both rallied about 4%. Over the last two months or so, precious
metals are up about 12%. Long term, we
are bullish on metals as central banks around the world continue with money
creation policies, negative interest rates and they are now openly, seriously
considering helicopter money. Helicopter
money has central banks creating money but instead of using the newly created
money to buy assets from banks, the newly created money is distributed directly
may sound good to some of our readers, history teaches us that policy pursuit
always ends badly.
it’s possible that we will witness a bit of a pullback in the price of precious
metals as markets rarely move upward over a long time at a 6% monthly gain
trajectory. Our most reliable technical
indicators tell us that we could see a pullback in gold prices. We would view those price pullbacks as buying
or accumulation opportunities if your time frame is long term.
Federal Reserve began to increase interest rates in 2019 and the stock market
reacted negatively, the central bank quickly reversed course and began to
cut. The reality is that the easy money
policies of central banks have provided some juice to the economy and the
markets but as time has passed it has taken a more easy money juice to produce
a watered-down economic result.
This past week, Dr. Lacy Hunt, chief economist at Hoisington Management Company, did an interview in which he discussed this phenomenon. Dr. Hunt is certainly worth paying attention to. Hoisington Management Company manages more than $5 billion for retirement plans, charitable organizations, and insurance companies.
interview, Dr. Hunt stated that debt-financed fiscal programs are
ineffective. He cited statistics from
2019 that revealed each dollar of private nonfinancial debt generated only 40
cents of GDP. That’s down 25% in the
last twenty years according to Dr. Hunt.
Here is an excerpt from his interview (Source: https://milleronthemoney.com/just-the-facts-please/) (emphasis
While the aggregate debt
problem is not as bad in the U.S. as in other major economies, debt levels
are unprecedented in the government and corporate sector, and thus should
serve as a major constraint on U.S. economic growth. Gross U.S. government
debt outstanding increased to 107% of GDP late last year, the highest since the
…. Substantial peer-reviewed economic research indicates that the U.S. economy loses one-third of its trend economic growth rate when the government debt ratio rises above 90% for a period of five years. The U.S. has met that condition since 2014. When viewed from a cyclical perspective, the increase in Federal debt in 2018 and 2019 is even more serious.
In late-stage expansions, economic theory indicates that budget deficits should be reduced and with it, the ratio of debt to GDP should fall.
in economic conditions would lead to a quick worsening in the ratio, pushing
the debt ratio further into uncharted waters, even without new fiscal
measures that would likely be enacted in such circumstances.”
As we have been stating, debt levels brought the economy and the
markets down in 2007 and they are worse now than they were then both in the
private sector and the public sector.
The economic research that Dr. Hunt spoke about in his interview concluded that when government debt exceeds 90% of gross domestic product for a period of five years, the US economy loses one-third of its trend economic growth rate. The US has been there for going on 6 years now.
That seems to forecast an economic slowdown.
The most important thing to take from the interview with Dr. Hunt
is that the “new fiscal measures that would likely be enacted in such
circumstances" will make the problem worse. In other words, the economic medicine that
will be prescribed will make the patient sicker.
We have long forecast that we will get deflation or inflation
followed by deflation depending on the course of action that the Federal
Reserve elects. Presently, the Fed can
print money and buy assets from banks. The
Fed cannot legally print money and pay the government’s bills. In order for that to happen the Federal
Reserve Act which was passed in 1913 would need to be amended.
Dr. Hunt states in his interview
that is what the proponents of Modern Monetary Theory want to do; change the
Federal Reserve Act to allow for the Fed to print money and pay the
That dramatically changes the
dynamics of money printing.
Dr. Hunt states that is exactly what
occurred during 60 hyperinflationary periods that he’s studied including
Germany after World War I which was the infamous Weimar Republic
hyperinflation. It is precisely what
happened in China in the 1930’s and 1940’s and in the great Yugoslavian and
Bolivian inflations that have been studied extensively.
We have often written about the hyperinflation of John Law’s
France in the early 1700’s and again in France in the late 1700’s.
Each time “Modern Monetary Theory” has been tried, it’s been an
unmitigated economic disaster. (For the
record it’s not modern and it’s not theory, the outcome is totally
predictable.) Yet, it’s being seriously
tossed around by economic advisors to politicians as a viable economic policy.
Stephanie Kelton, economic advisor to Presidential hopeful, Bernie
Sanders and economics professor touts MMT as a panacea for everything that ails
us. The title of her upcoming book (to
be released in June of this year) is “The Deficit Myth; Modern Monetary Theory
and the Birth of the People’s Economy” is telling.
Here’s an excerpt from Ms. Kelton’s website about her
soon-to-be-released book (Source: https://stephaniekelton.com):
can help us fight a myriad of problems that plague our economy–inequality,
poverty and unemployment, climate change, housing, health care, and more. But
we can’t use deficits to solve problems if we continue to think of the deficit
itself as a problem.
It’s a nice thought to think that we can cure poverty and
inequality by just printing the money we need, but history teaches us it won’t
work. We’ll side with Dr. Hunt here,
Will we ultimately get to MMT as an economic reality?
Probably. We come to that
conclusion only because there is one other alternative; cutting spending to the
point that the budget is balanced, or at least far closer to balanced. That is unlikely to happen.
We recently did some research in this area to prepare for a new
presentation that we were giving. When
you consider the numbers, it’s nothing short of mind-boggling. Collectively through the years, our
politicians have put us in a tough position financially speaking.
Here are the stats:
-55% of American households pay taxes. There are 128 million US Households which
means 70 million households pay taxes.
-The national debt is now more than $23 trillion. On a per taxpaying household basis, that
amounts to more than $325,000.
-The last Social Security trustee report stated that Social
Security is underfunded by about $43 trillion.
That’s an additional share per taxpaying household of more than
-Medicare’s underfunding by some accounts is twice that of Social
Security. That’s another $1,200,000 for
each taxpaying household.
-Total per household for just these 3 items? More than $2 million.
-Total national debt and unfunded Social Security and Medicare
liabilities far exceed the total net worth of all households combined.
There are two courses of action.
Massive cuts to balance the budget or more printing.
If you haven’t yet taken steps to protect yourself, you should. This week’s Retirement Lifestyle Advocates Radio Program is now posted at www.RetirementLifestyleAdvocates.com. It features a tax conversation with host, Dennis Tubbergen and author, Dan Pilla.
“All my life I’ve been trying to get a hole-in-one. The closest I’ve come is a bogey”
― Lou Holtz